When you apply for a loan, you must repay the borrowed sum with interest in Equated Monthly Installments or EMIs. Each EMI is partly composed of the principal amount, and partly of the interest component. Since EMIs are monthly obligations, correctly estimating them is important to plan your finances.
When you shop for items on EMI via an online marketplace, EMI amounts are listed clearly against the plan duration. However, for loans, you may have to compute the EMIs payable beforehand to see if the loan is a financially viable option. So, if you are about to apply for a personal loan or home loan, you should check out this guide on how to calculate your loan EMI.
EMI calculation formula
Before we proceed to the step-by-step guide on EMI calculations, let’s first understand the formula used for such calculations. The following mathematical formula is used to calculate loan EMIs:
EMI = [P x R x (1+R)^N]/[(1+R)^N-1]
Where, P is the principal sum
R is the rate of interest
N is the tenure of the loan
While you can use this formula to compute the EMIs for your loan, doing so manually can be both time-consuming and prone to errors. Instead, you can use an automated EMI calculator tool to simplify the calculation and offer accurate results.
How to calculate loan EMIs using an EMI calculator
Here’s a step-by-step guide on how to calculate your loan EMIs using an EMI calculator tool:
Step 1: Choose the right EMI calculator tool
Select a reliable EMI calculator tool. You can find various kinds of EMI calculators listed on trusted NBFC and bank websites. You can choose from specific types of loans like home loan EMI calculators, personal loan EMI calculators, and business loan EMI calculators, depending on the type of loan you need.
Step 2: Enter the amount you wish to borrow
Input the principal amount or loan amount you wish to borrow. Remember borrowing a high principal amount will increase your monthly EMIs.
Step 3: Input the applicable interest rate
Enter the interest rate offered by your shortlisted vendor. The interest rate offered can vary from one lender to the next based on different factors like loan tenure, creditworthiness of the borrower, internal policies, etc. They can also be fixed or floating. In case of floating rates, EMIs will vary during the loan term as rates fluctuate in keeping with changes in market rates. However, you should note that higher the interest rate, the higher your EMI amount.
Step 4: Select a loan tenure
Pick your desired loan repayment tenure. Depending on the calculator you choose, you can input the tenure in months or years. Since loan tenure is inversely proportional to EMIs, selecting a longer tenure will lower your EMI obligation. However, it will result in higher overall interest payments over the course of the loan.
Step 5: Calculate your EMIs
Press the ‘Calculate’ button to review the EMI amount, the total interest charged, and the total loan value.
Why choose an EMI calculator to estimate loan EMIs
Choosing an EMI calculator over manually computing your EMIs is prudent due to the following reasons:
- Accuracy: Calculating EMIs payable manually involves solving complex financial calculations. Making an error in even one step of the calculation can result in incorrect outputs. Using EMI calculators eliminates the possibility of errors since these tools use advanced algorithms to accurately calculate EMIs.
- Time-saving: Solving mathematical equations manually will consume a significant degree of time and effort. EMI calculators are tailored to complete these calculations in a matter of seconds to offer instant results. You can plan your repayment as accurately as possible based on these precise and instant EMI calculations.
- Run multiple scenarios: EMI calculators allow you to adjust the loan amount, tenure, and interest rates to see how each factor impacts your EMIs. Running multiple scenarios on the calculator will help you finalise the ideal borrowing parameters for your loan.
- Compare different lenders: Given the speed and accuracy of EMI calculators, you can use these tools to effectively compare lenders and loan offers. You can enter varying interest rates offered by different banks and NBFCs to see which one is the most cost-effective option.
Conclusion
Calculating EMIs is a critical step in loan planning. While manually calculating EMIs is possible, the process is too long and the possibility of human error is high. EMI calculators are a good alternative since they help accurately estimate EMIs in a matter of seconds. You can compute the EMI payable monthly, simply by inputting the loan amount, tenure, and interest rate into the tool. While you can compute EMIs at any time, it’s always best to calculate them before applying for a loan to ensure you can manage repayments.